The dominant economic narrative in the UK is a pretty gloomy one just now.
True, employment is at a record high. But, counter the whingers and whiners, zero hours contracts and low pay proliferate.
The political discourse is full of the struggles of the JAMs – the Just About Managing The public sector moans about its pay. During the election, Labour played ruthlessly on the fears and anxieties of the elderly about inheritance and the value of pensions.
All in all, the picture seems bleak. But a much more positive vision is given by the Office for National Statistics (ONS) in its measure of well-being.
The Measuring National Well-being (MNW) programme was established in November 2010 under David Cameron. It is not without its critics. But if we take it at face value, compared to a year ago the country is definitely happier.
As the ONS puts it: “the latest update provides a broadly positive picture of life in the UK, with the majority of indicators either improving or staying the same over the one year period”.
There seems to be a bit of a glitch. The ONS boasts of using no fewer than 43 separate indicators to measure well-being. But they go on to state, in the very same sentence, that of these 43 measures, “15 improved, 18 stayed the same and two deteriorated, compared with one year earlier”. Perhaps the relevant statistician here received his or her basic training at the Diane Abbott School of Arithmetic.
No matter, it could be that some of the series have simply not been updated at all. Certainly, many people might not be too concerned to learn that “on environmental sustainability, the proportion of waste from households that was recycled fell over a one-year period, while remaining unchanged over the three-year period”.
But compared to a year previously, on some key indicators, as a nation we were more satisfied with our jobs, felt our health was better, and enjoyed our leisure time more.
This does not fit readily with political discussion recently in the mainstream media.
One possible reason is that many of the ONS measures rely on conventional survey techniques. These can take some time to carry out. So the ONS only release new data every six months, and the latest one was in April. The indicators could just be out of date.
However, a very similar story is told by a real-time analysis of Twitter data, which I have been carrying out with my UCL colleague Rickard Nyman since June 2016 (admittedly just for the London area).
We use advanced machine learning algorithms which essentially measure the sentiment level of a tweet as a whole, rather than relying on the now obsolete approach of looking for specific positive and negative words.
Sentiment in London started to rise quite sharply last autumn, dipped down slightly in April and May, but is now back up again.
Many conventional economic statistics are not really designed for the modern economy. So, despite, all its faults, the ONS well-being measure may be a step in the right direction, and regardless of what the media tells you, Britain may indeed be getting happier.
As published in City AM Wednesday 19th July 2017
The slow recovery since the financial crisis remains a dominant issue in both political and economic debate.
The economy has definitely revived since 2009, the depth of the recession, in both Britain and America. The average annual growth in real GDP has been very similar, at 2.0 and 2.1 per cent respectively. This is much better than in the Mediterranean economies, where growth over the 2009-2016 period is still negative. Even so, the Anglo-Saxon countries have not expanded as rapidly as they have done in previous recoveries.
A key reason for this is the lack of vision being shown by the corporate sector. True, highly innovative companies like Facebook have emerged over the past decade, and start ups continue to proliferate.
But the longer standing major firms in both the UK and the US have become real stick in the muds. Caution, safety first and an increasingly stultifying bureaucracy envelop them.
The contrast in the behaviour of the corporate sector in the two major financial crises of the 1930s and late 2000s makes this clear. The US national accounts only have data going back to 1929, the year before the Great Recession. But in that year, the net savings of non-financial companies was 3.5 per cent of GDP.
When the recession struck, firms ran down their accumulated cash. Between 1930 and 1934, their net savings were negative, averaging -2.4 per cent of GDP. That amounts to a shift during the recession from a surplus of $650 billion in 1929 to an annual overspend of $450 billion in today’s prices.
In the United States, during the decade prior to the crash, 1998-2007, companies on average had net savings of 2.6 per cent of GDP each year. Since 2009, this has averaged 4.0 per cent. So instead of spending their assets, as they did in the 1930s, companies this time round have simply saved more.
To be fair, American firms are gradually moving back towards their savings patterns prior to the crisis. From 5.4 per cent of GDP in 2010, net savings in 2016 were back down to 3.1 per cent. They are gradually getting their confidence back, their “animal spirits” as Keynes called it.
There are signs of this happening in Britain as well. Between 1998 and 2007, net savings by non-financial companies averaged 1.3 per cent of GDP. From the trough of the recession to now, the annual average has been 2.7 per cent. As in the US, the figure has come down from 2009-2011, when it averaged 3.8 per cent. But firms remain cautious.
But in both the UK and the US, companies are sitting on piles of cash and lack the entrepreneurial spirit to spend it. Boards obsess about fashionable concepts such as lean and agile processes and management. At the same time they set up procurement systems more suited to the old Soviet Union in terms of the tick box mentality which prevails.
Capitalism must be seen to be delivering the goods, and many of our major companies are simply not doing this.
As published in City AM Wednesday 12th July 2017
Image: London Construction by Bonny Jodwin is licensed under CC by 2.0
The income tax system in the UK is highly progressive.
Not many people know that, to use a catch phrase attributed, rightly or wrongly, to the great actor Michael Caine.
The top one per cent of earners contribute 27 per cent of all income tax receipts. To put it in context, just 300,000 people pay nearly three times as much in total as the bottom 15m taxpayers. Despite all the political rhetoric about tax avoidance, high earners cough up a very large amount of money to the Exchequer every year.
Under the Labour government of the 1970s, the highest marginal tax rate was no less than 98 per cent. But the top one per cent of earners paid only 11 per cent of all income tax.
Jeremy Corbyn and shadow chancellor John McDonnell pledged in their manifesto to raise around another £15bn a year in tax from this group. In addition, corporation tax on profits would allegedly raise a further £19bn.
The realism of Labour’s costings as a whole was called into serious question at the time by people such as Paul Johnson at the Institute for Fiscal Studies.
A paper published in the latest American Economic Review produces strong evidence that it is purely wishful thinking to imagine that anything like these amounts could be raised. In the modern world, both skilled labour and capital are highly mobile. There would simply be movement out of the UK altogether.
The authors, Enrico Moretti and Daniel Wilson of Berkley and the San Francisco Federal Reserve Bank, carry out a very detailed statistical analysis of the impact of the different state income tax rates in the US on where highly skilled people choose to work.
Personal taxes vary enormously across the American states. In California, for example, the average tax rate arising on top earners which is due solely to state rather than federal taxation is eight per cent. In contrast, in Texas (and eight other states) it is zero. Over the period of the study – 1977 to 2010 – rates have also varied substantially within individual states.
Moretti and Wilson compile an impressively detailed set of data on individuals they describe as ‘star scientists’, defined as those scientists who are very prolific in generating patents. They examine the location decisions of some 260,000 individuals during the period they analyse.
Their conclusion is unequivocal: “we uncover large, stable, and precisely estimated effects of personal and corporate taxes on star scientists’ migration patterns”. Essentially, steep taxes drove away high-achievers.
Tax rates are important not just to individuals in choosing where they want to work. The different corporate tax rates levied by individual states affect where companies such as Microsoft and General Electric locate their most productive and innovative researchers.
There are of course many factors which determine where people and firms decide to locate. But the idea that innovative people will simply sit around en masse and wait to be fleeced is pure fantasy. There may be little chance of the current Labour leadership understanding the real world, but the electorate needs to.
As published in City AM Wednesday 5th July 2017
Image: Jeremy Corbyn and John McDonnell by Rwendland is licensed under CC BY-SA 4.0
Perhaps George Osborne’s most abiding legacy from his time as chancellor will be the creation of the concept of the Northern Powerhouse. Certainly Manchester, its principal focus, is booming.
The landscape of the centre is being altered dramatically by skyscrapers. Peel Holdings, the huge investment and property outfit, is planning to double the size of the development around Media City in the old docks, where the BBC was relocated. The airport, already the third busiest in the UK, is expanding.
All in all, it seems a triumph for modern capitalism. After decades of relative decline, a city is being transformed by private enterprise. But what is really going on?
In a piece this month in the MIT publication Technology Review, urban guru Richard Florida has picked up on a startling new trend in the location of new technology companies in the US.
In the 1980s, there were essentially no high tech companies in city locations. Instead, we had Intel and Apple in Silicon Valley, Microsoft in the Seattle suburbs, the Route 128 beltway outside Boston, and the corporate campuses of North Carolina’s Research Triangle.
Now, urban centres are rapidly becoming the places which attract technology companies. In 2016, the San Francisco metro area was top of the list for venture capital investment, attracting more than three times the amount of the iconic location of Silicon Valley. Google has taken over the old Port Authority building in Manhattan. Amazon’s headquarters are in downtown Seattle.
The impact of this new, high concentration of tech firms is to intensify geographic inequalities. As Florida puts it: “tech startups helped turn a handful of metro areas into megastars. Now, they’re tearing those cities apart.”
A relatively small number of urban areas in America, and within them a small number of neighbourhoods, are capturing all the benefits.
The same sort of thing seems to be going on in Greater Manchester. A few areas are soaring away and attracting wealth and talent. In 1981, fewer than 600 people lived in what the Council describes as “the heart of Manchester”. Now, over 50,000 do, almost all of them young graduates.
But the more traditional outlying boroughs of the city region, especially to the north and east, are struggling to capture any trickle down from this massive transformation. Indeed, they are at risk of losing out, as their young bright sparks are attracted by the life of the inner metropolis.
Richard Florida does not just identify the problem, he suggests some possible solutions. One of which is a programme of building lots of good housing in the outlying areas, supplemented by a top class public transport service. This would keep house prices down, and attract some of the people stuck in rabbit warrens in the urban centres.
Manchester already has a modern tram service. But the new Labour mayor, Andy Burnham, is resolutely opposed to building on the green belt just to the north and east of the city. Yet another example of the sanctimonious intentions of the Left serving to intensify, not reduce, inequality.
As published in City AM Thursday 29th June 2017
There is a great deal of discussion, following the election, of relaxing or even abandoning austerity.
There is an equal amount of confusion about this, because the same word is being used to describe two quite separate concepts.
The consequences of the government changing its policy on austerity are dramatically different, depending on which one it is.
One meaning of the word is what we might call “social austerity”. From any given pot of money available to a government, its supporters believe that, in general, tax cuts should be promoted rather than public spending increased. Opponents argue that public spending as a result has become underfunded. Local councils, education, and the NHS all need more money.
Social austerity can be relieved, as even the DUP and some Conservatives argue, by increasing spending appropriately, and funding it by increases in taxation. This was an important aspect of Labour’s manifesto, and the tragedy at Grenfell Tower has intensified the discussion around it.
The main risk is purely political. Are voters really and truly willing to pay more tax, rather than just wanting someone else to pay it?
There are some potential adverse economic consequences if the policy of higher taxation is pushed too far. Former French President Francois Hollande’s 75 per cent tax rate led to several hundred thousand skilled young people leaving France, mainly for the UK. If companies are taxed too heavily, they may choose to locate to another country. Both skilled labour and capital are geographically mobile.
But, within reason, social austerity could be relaxed without perhaps too many fears in this direction.
“Economic austerity” is quite a different matter. Opponents of this want to increase the gap between government spending and tax receipts – the so-called fiscal deficit. This is funded by issuing government bonds. So the deficit in any given year goes up, and the outstanding stock of government debt also rises.
Any relaxation of social austerity is paid for by higher taxes now. Any relaxation of economic austerity is paid for by borrowing more now.
But the debt has to be repaid at some point, and the interest payments on it must be met. So taxes in the future will be higher. Either way, less austerity means more tax.
John Maynard Keynes himself made it very clear that increasing public spending at a time of full employment would simply lead to more inflation. There are areas of the country where there probably are people registered as unemployed who genuinely do want to work – the Welsh Valleys, for example. But the rest of the UK is at full employment.
The number of people in employment is at an all-time high, at 32m. This has risen by 2.8m since 2010. Meanwhile the unemployment rate has fallen from 7.9 per cent in 2010 to just 4.6 per cent today.
Any major fiscal stimulus to the economy now would simply bid up wages, leading to higher costs and higher inflation.
The public mood on social austerity may have shifted. But the case for economic austerity is stronger than it has ever been.
As published in City AM Wednesday 21st June 2017
Image: People’s assembly by Peter Damian is licensed under CC by 2.0
One of the most remarkable features of the Conservative election campaign was the dog which did not bark.
There was no systematic attempt to undermine Jeremy Corbyn’s wholly implausible economic narrative. Magic Money Tree comments aside, Labour’s economic incompetence was allowed to pass almost unchallenged.
One part of Labour’s economic offer which really did strike a chord with the electorate was the promise to nationalise industries such as rail and water. To anyone with direct experience of the old British Rail or the Post Office (which made you wait six months to get a phone installed) this almost defies belief. But only those over 55 can remember.
The fact is that for a number of years there has been strong and consistent support in surveys for taking industries such as rail into public ownership.
In 2013, for example, the moderate Labour website Labour List commissioned an analysis by the poll company Survation. In terms of rail nationalisation, 42 per cent thought fares would be cheaper, compared to only 12 per cent who thought they would go up. Those believing the quality of the services would improve easily outnumbered those who thought it would get worse, by 38 to 14 per cent. There are many similar examples.
Economists are pretty dismissive of the results of surveys about hypothetical situations or choices. A key foundation of economic theory is the concept of revealed preference, to use the jargon phrase. Individuals are assumed to have reasonably stable tastes and preferences. These preferences are revealed not through answers to hypothetical questions, but through how they actually respond to changes in the set of incentives which they face.
In the National Passenger Survey, for example, 80 per cent of respondents routinely express satisfaction with their journey, compared to fewer than 10 per cent who are dissatisfied. But how does this translate into actual decisions?
Prior to rail privatisation just after the 1992 election, the peak number of passenger journeys made each year was some 1.1bn in the mid-1950s. Faced with rapidly rising road competition, the rail industry saw journeys fall steadily, to a trough of around 750m in the mid-1990s.
After privatisation, massive investment programmes have been carried out and, in the form of the train operating companies, there is now a distinct part of the industry whose priority is the consumer. Journey numbers rose, passing the 1bn mark in 2003, to the current level of 1.7bn, a figure not seen since the early 1920s, when road competition was weak.
So the revealed preference of consumers seems to be that they rather like the current structure. They actively choose to use rail in massive numbers.
Rather like a good Party member in George Orwell’s book 1984, the electorate seems capable of believing two contradictory things at the same time. This reinforces the importance of narratives in politics. Trying to treat voters as rational agents often ends in tears, as both Cameron and May have discovered.
As published in City AM Wednesday 14th June 2017
Image: Jeremy Corbyn by Garry Knight is licensed under CC by 2.0
Whoever wins the election tomorrow will have to grapple with what appears to be a fundamental economic problem. Estimated productivity growth in the UK is virtually at a standstill.
The standard definition of productivity is the average output per employee across the economy as a whole, after adjusting output for inflation – or “real” output, in the jargon of economics.
The amount in 2016 was the same as it was almost a decade ago in 2007, immediately prior to the financial crisis.
Productivity is not just some abstract concept from economic theory. It has huge practical implications. Ultimately, it determines living standards.
Productivity is real output divided by employment. The Office for National Statistics (ONS) has a pretty accurate idea of how many people are employed in the economy. They get data from company tax returns to HMRC.
What about output? The ONS uses a wide range of sources to compile its estimates. But these essentially provide it with information about the total value of what the UK is producing.
The ONS has the key task of breaking this number down into increases in value which are simply due to inflation, and those which represent a rise in real output.
This problem, easy to state, is fiendishly difficult to solve in practice. To take a simple illustrative example, imagine a car firm makes exactly 10,000 vehicles of a particular kind in each of two successive years, and sells them at an identical price. It seems that real output is the same in both years.
But suppose that in the second year, the car is equipped with heated seats. The sale price has not changed. But buyers are getting a better quality model, and some would pay a bit extra for the seats. So the effective price, taking into account all the features, has fallen slightly.
Assessing the impact of quality changes is the bane of national accounts statisticians’ lives. The car example above is very simple. But how do you assess the quality change when, for example, smartphones were introduced?
The ONS and its equivalents elsewhere, such as the Bureau of Economic Analysis in America, are very much aware of this problem. But even by the early 2000s, leading econometricians such as MIT’s Jerry Hausman were arguing that the internet alone was leading inflation to be overestimated by about 1 per cent a year, and real output growth correspondingly underestimated.
Martin Feldstein is the latest top economist adding his name to this view. Feldstein is a former chairman of the President’s Council of Economic Advisers, so he is no ivory tower boffin.
In the latest Journal of Economic Perspectives, Feldstein writes:
“I have concluded that the official data understate the changes of real output and productivity. The measurement problem has become increasingly difficult with the rising share of services that has grown from about 50 per cent of private sector GDP in 1950 to about 70 per cent of private GDP now”.
The Bean report into national accounts statistics last year acknowledged these problems. It could well be that there is.
As published in City AM Wednesday 7th June 2017
The Office for National Statistics (ONS) published last week some figures which show how a successful monetary union works in practice.
It is not obvious at first sight, from the dry heading: “regional public sector finances”.
The ONS collects information on the amounts of public spending and money raised in taxes across the regions of the UK. The difference is the so-called fiscal balance of the region.
Only three regions generate a surplus. In London, the South East and the East of England, total tax receipts exceed public spending. The capital has a healthy positive balance of £3,070 per head, followed by the South East at £1,667 per head.
Essentially, these two regions subsidise the rest of the UK. Public spending in the North East, for example, is £3,827 per person above the level of taxes raised in that region. In Wales, it is even higher at £4,545. No wonder that one of the first things Carwyn Jones, leader of the Welsh Assembly, said after the Brexit vote was: “Wales must not lose a penny of subsidy”.
The region which benefits most is Northern Ireland, which gets £5,437 per head more than it generates in tax. Scotland, to complete the picture, receives around half of that, at £2,824 per person.
There is a lot of debate around Brexit and the border between the North and the Republic of Ireland. There is even talk of reunification, but on these numbers the Republic would be mad to want it.
Essentially, the regions receive these subsidies because they are running deficits on their trade balance of payments. The exports of goods and services from the North East, for example, to the rest of the UK are much less than it imports. In balance of payments jargon, the subsidy it receives is a monetary transfer from the rest of the country, principally from London and the South East.
The ONS does not actually produce regional balance of payments statistics. But the fact that most regions receive these large transfers implies that they are just not productive enough to sustain their living standards by their own efforts.
All the regions are in the sterling monetary union. Those running trade deficits cannot devalue to try to improve their position. They must instead rely on subsidy.
Exactly the same principles apply in the Eurozone. The massive difference of course is that there is no central Eurozone government to make sure the weaker performing regions receive the necessary funding.
This is why President Macron and Chancellor Merkel announced they will examine changes to treaties to allow for further Eurozone integration. Even the hardline German finance minister, Wolfgang Schauble, said: “a community cannot exist without the strong vouching for the weaker ones”.
To be sustainable, a monetary union needs large transfers between its regions. London and the South East already put their hands deep into their pockets for the rest of the UK. Gordon Brown did get one thing spectacularly right. He kept us out of the Euro.
As published in City AM Wednesday 31th May 2017
Image: Euro sign by Alex Guibord is licensed under CC by 2.0
The two main manifestos have been published. Initially at least, the Labour one seems the more popular. Many people are susceptible to being bribed with other people’s money.
Labour claims that their plans to spend an additional £49 billion have been fully costed. At one level, this is true. A set of tax changes and estimates of the additional revenue they will bring is presented. These numbers do add up to the same sum as the extra spending.
It would be pure nit picking to ask where the money is to come from to pay for the nationalisation of the rail, water and mail industries. Labour says the shareholders would receive government bonds in exchange for their equity. This extra borrowing would foot the bill.
Perhaps it would be even more trivial and tendentious to draw attention to the proposed National Transformation Plan, which will spend an extra £250 billion over ten years on infrastructure. This, too, would be financed by additional government borrowing.
After all, Labour says: “we will take advantage of near-record low interest rates”. Indeed, longer term UK government bonds are currently trading at a yield of around 1 to 1.5 per cent.
But this is the essence of the problem. In economics-speak, the bond yield may not be invariant to the size of the deficit. In English, if borrowing rises sharply, interest rates might also go up.
Keynes is often regarded as the intellectual inspiration of those who want to see government borrowing increased. He himself was far more cautious. True, in his magnum opus the General Theory, he did advocate higher government spending to try and solve the depression of the 1930s. But he was very careful to point out that the potential benefits of a bigger deficit could be cancelled out if, as a result, interest rates rose sharply.
This is not a mere theoretical abstraction. In the Mediterranean economies in recent years, interest rates have regularly risen to 6 or 7 per cent, and sometimes higher still, in one of the many crises in confidence in government prudence which have taken place. The idea that Labour could borrow hundreds of billions of pounds with no consequence for interest rates is stretching credibility to breaking point.
More generally, the whole of Labour’s manifesto is costed on the naive assumption that tax and spending changes would not lead to any changes in how individuals and companies behave.
An additional £23 billion is planned from the corporate sector. It is possible that the tax will be passed onto consumers and this amount will be raised. But it may well be that companies will be deterred from operating in the UK at all, and corporation tax receipts will fall rather than rise.
Ex-President Hollande in France raised the top tax rate to 75 per cent. As a result, large numbers of highly skilled young French people moved to London.
The Left is very good at drawing up well intentioned detailed plans. But they usually fail because people change their behaviour in response to them.
As published in City AM Wednesday 24th May 2017
Image: Labour Party General Election Launch 2017 by Sophie Brown is licensed under CC by 2.0
Diane Abbott’s car crash of an interview on LBC radio last week hit the headlines. Asked politely but firmly for the numbers and costings of Labour’s plans on the police, her answers varied wildly from sentence to sentence.
Of course, being charitable, it was always open to Labour’s shadow home secretary to spend a few minutes actually bothering to read her brief before going on the programme. But the whole of Labour’s leadership give the impression of finding numbers difficult.
They are by no means alone in their apparently low level grasp of even basic mathematics. At the end of last year, the OECD released the detailed results of its global Programme for International Student Assessment (Pisa) tests. Pisa assesses the extent to which 15 year olds have acquired the skills which are essential in modern societies.
Over half a million students from 72 countries took the tests. These are in reading, science and maths. Pisa does not just ascertain whether students can reproduce knowledge. It also examines how well they can extrapolate from what they have learned and can apply that knowledge in unfamiliar settings.
The tests divide the results into six levels. At the top level, in the OECD’s words, students “are capable of advanced mathematical thinking and reasoning… they can apply this understanding to develop new approaches and strategies for attacking novel situations”. The UK comes out almost exactly in line with the OECD average in terms of high performers, with 10.6 per cent of students achieving levels five or six in maths, compared to the average of 10.8 per cent across the 72 countries as a whole.
In contrast, in mainland China, Hong Kong, Taiwan and Singapore, more than 25 per cent of students had scores which put them in these top levels.
Perhaps even more worryingly, no less than 21.9 per cent of those taking the tests in the UK scored “below level two”, as the OECD tactfully puts it. In plain English, they were in level one, the bottom set.
In 2016 the Joseph Rowntree Foundation (JRF) carried out a major study on literacy, numeracy and ICT skills just within England. Both its age groupings and its definitions of the ability levels differ somewhat from those of the Pisa report, but the results are the same. No less than 29 per cent of 16 to 18 year olds are at level one or below. Below level one, people are not able to understand price labels in shops.
But it gets even worse. People over 55 have better literacy and numeracy skills than those under 25. So what?, you might say, my everyday experience shows me this very clearly. But the JRF points out than in all other developed countries, the exact opposite is true. Only here are the young less well educated than the old.
This whole body of evidence is a devastating indictment of the educational establishment and the teachers’ unions who enthusiastically support the likes of Dianne Abbott. Time for a real shake up!